Sunday, July 29, 2012

Why does Wall Street hate you?

Ask anyone in the business to name the highest-flying restaurant chains and you’ll likely hear four names: McDonald’s, Chipotle, Starbucks and Buffalo Wild Wings. Mention any of them to a financial analyst and you’ll see how a bull reacts to a red cape. Or maybe I should say a bear. 

All those consistent overachievers have been slammed in recent days by investors howling about everything from sluggish consumer spending to heightened competition, climbing commodity costs and global economics. As if the industry never faced those challenges before.

To put it in perspective: In less time than it takes to move through the lunch line at Chipotle, the company lost 20% of its value. The worth of Starbucks’ shares dropped 11% in a day. And that was after reporting an 8% rise in comparable store sales for a quarter.

In fairness: Stock pickers aren’t seeing monsters under the bed. Starbucks, for instance, missed its earnings expectations, which in the financial world is worse than kicking your grandmother. The chain acknowledged that sales have been “noticeably down” in many markets since late spring.

BWW was forsaken because of concerns about the cost of chicken wings, its main sales and traffic driver.

Still, which company would you rather own? Your current one, or one of those four industry leaders

The choice is even easier when you consider the question of the moment: If that’s how investors are reacting to the mega-four, how’re they reading everyone else in the foodservice business?

We’re of course about to find out. In one of those bad timing breaks, the investing public is getting the chance to vote with its dollars on three new issues. Chuy’s, Del Frisco, and Ignite Restaurant Group, the parent of Joe’s Crab Shack and Brick House Tavern, all recently went public. The parent companies of Carl's Jr. and Outback Steakhouse are about to go back to the public equity markets.

The implications could be chilling. What’ll be the takeaway for the private-equity companies that scarfed up restaurant chains right before the Great Recession with the intention of flipping them? We’re at the four-year mark, and five years is often the trigger to enact the exit strategy.

And how about mergers and acquisitions? There’ve been a number of stock purchase offers recently, from P.F. Chang’s to California  Pizza Kitchen to Benihana. Will that accelerate as stock prices are hammered?

Stay tuned. We’ll try to differentiate the bulls from the BS.

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